With all the bad news that has dominated the airwaves in recent months it was very welcome to see that US CPI rose significantly less than expected in October to its lowest level since January, prompting a huge relief rally in stocks, bonds as well as a sharp selloff in the US dollar.
The rally was given added legs by at least three Fed speakers, Dallas Fed President Lorie Logan, Philadelphia Fed President Patrick Harker, and San Francisco Fed President Mary Daly, who indicated that a slower pace of rate hikes might be appropriate.
US headline CPI has been falling from its peaks in June for several months now, but core prices have proved to be slightly stickier.
“Yesterday these fell back as well, and while the rise in the US dollar may have had a part to play in that, it’s still welcome news at a time when investors are concerned about central banks overtightening,” CMC Markets chief market analyst Michael Hewson said this morning.
“Unfortunately, inflation is showing little signs of slowing elsewhere, and while one number doesn’t make a trend, markets latched onto the weak number, pushing European markets sharply higher, with the DAX closing well above its 200-day SMA and its highest level since June,” he added.
“As if to emphasise the diverging fortunes when it comes to inflation, German CPI inflation for October is expected to be confirmed at a record high of 11.6 per cent later today, while UK CPI could see a move up to 10.5 per cent next week,” Hewson noted.
US markets also closed strongly higher, posting their biggest one day move since April 2020.
Asia markets have seen a similarly positive session, carrying over from the US, but also boosted by reports that China has taken the decision to scrap Covid flight restrictions, as well cutting the quarantine requirements for inbound travellers to 8 days, with other tweaks with respect to close contact periods for those who have been in contact with confirmed cases.
“This looks set to spill over into a strong end to the week for markets in Europe, with markets here looking to set to build on yesterday’s strong rally with a positive open,” Hewson said.